Valuation of a Startup

Before investing in a startup the first question asked by any investor is what is the worth of company?

This is a big question for the entrepreneur because unlike the well established companies with revenues and assets, valuation of a company which is yet to receive revenue is pretty difficult.

Pre-money and Post money valuation is one of the methods for valuation of a company

The pre-money valuation refers to the company’s valuation before the investment. Investors, such as venture capitalists and angel investors will use a pre-money valuation to determine how much equity to ask for in return for their cash injection to an entrepreneur for his startup company.

Entrepreneurs want the value to be as high as possible and angels want a value low enough so that they own a reasonable portion of the company for the amount they invest.

For example if the pre-money value of a company is 400,000 and investor invests 100,000 then, the share of investor will be 100,000 of 500,000(400,000+100,000) that is he owns 20% of the company.

Suppose if the pre-money was 500,000 then the investor owns 100,000 of 600,000 that is 16.67% only.

That’s why pre-money value of the company is the first point of contention that must be negotiation between investors and entrepreneurs.